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PowerPoint Lectures for Principles of Economics, 9e By Karl E. Case, Ray C. Fair & Sharon M. Oster. ; ; . International Trade, Comparative Advantage, and Protectionism. Prepared by:. Fernando & Yvonn Quijano. International Trade, Comparative Advantage, and Protectionism.

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PowerPoint Lectures for

Principles of Economics, 9e

By

Karl E. Case, Ray C. Fair & Sharon M. Oster

; ;

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International Trade,Comparative Advantage,and Protectionism

PART VIITHE WORLD ECONOMY

34

CHAPTER OUTLINE

Trade Surpluses and Deficits

The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Terms of Trade

Exchange Rates

The Sources of Comparative Advantage

The Heckscher-Ohlin Theorem

Other Explanations for Observed Trade Flows

Trade Barriers: Tariffs, Export Subsidies, and Quotas

U.S. Trade Policies, GATT, and the WTO

Free Trade or Protection?The Case for Free Trade The Case for Protection

An Economic Consensus

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International Trade, Comparative Advantage, and Protectionism

The “internationalization” or “globalization” of the U.S. economy has occurred in the private and public sectors, in input and output markets, and in firms and households.

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Trade Surpluses and Deficits

trade surplus The situation when a country exports more than it imports.

trade deficit The situation when a country imports more than it exports.

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The Economic Basis for Trade: Comparative Advantage

Corn Laws The tariffs, subsidies, and restrictions enacted by the British Parliament in the early nineteenth century to discourage imports and encourage exports of grain.

theory of comparative advantage Ricardo’s theory that specialization and free trade will benefit all trading partners (real wages will rise), even those that may be absolutely less efficient producers.

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

absolute advantage The advantage in the production of a good enjoyed by one country over another when it uses fewer resources to produce that good than the other country does.

comparative advantage The advantage in the production of a good enjoyed by one country over another when that good can be produced at lower cost in terms of other goods than it could be in the other country.

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Mutual Absolute Advantage

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Mutual Absolute Advantage

 FIGURE 34.1 Production Possibility Frontiers for Australia and New Zealand Before Trade

Without trade, countries are constrained by their own resources and productivity.

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Mutual Absolute Advantage

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Mutual Absolute Advantage

 FIGURE 34.2 Expanded Possibilities After Trade

Trade enables both countries to move beyond their own resource constraints—beyond their individual production possibility frontiers.

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Comparative Advantage

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Gains from Comparative Advantage

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The Economic Basis for Trade: Comparative Advantage

Absolute Advantage versus Comparative Advantage

Why Does Ricardo’s Plan Work?

 FIGURE 34.3 Comparative Advantage Means Lower Opportunity Cost

The real cost of cotton is the wheat sacrificed to obtain it. The cost of 3 bales of cotton in New Zealand is 3 bushels of wheat (a half acre of land must be transferred from wheat to cotton— refer to Table 34.5). However, the cost of 3 bales of cotton in Australia is only 1 bushel of wheat. Australia has a comparative advantage over New Zealand in cotton production, and New Zealand has a comparative advantage over Australia in wheat production.

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The Economic Basis for Trade: Comparative Advantage

Terms of Trade

terms of trade The ratio at which a country can trade domestic products for imported products.

Exchange Rates

exchange rate The ratio at which two currencies are traded. The price of one currency in terms of another.

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The Economic Basis for Trade: Comparative Advantage

Exchange Rates

Trade and Exchange Rates in a Two-Country/Two-Good World

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The Economic Basis for Trade: Comparative Advantage

Exchange Rates

Exchange Rates and Comparative Advantage

If exchange rates end up in the right ranges, the free market will drive each country to shift resources into those sectors in which it enjoys a comparative advantage. Only those products in which a country has a comparative advantage will be competitive in world markets.

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The Sources of Comparative Advantage

factor endowments The quantity and quality of labor, land, and natural resources of a country.

The Heckscher-Ohlin Theorem

Heckscher-Ohlin theorem A theory that explains the existence of a country’s comparative advantage by its factor endowments: A country has a comparative advantage in the production of a product if that country is relatively well endowed with inputs used intensively in the production of that product.

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The Sources of Comparative Advantage

Other Explanations for Observed Trade Flows

Comparative advantage is not the only reason countries trade. It does not explain why many countries import and export the same kinds of goods.

Just as industries within a country differentiate their products to capture a domestic market, they also differentiate their products to please the wide variety of tastes that exists worldwide.

Just as product differentiation is a natural response to diverse preferences within an economy, it is also a natural response to diverse preferences across economies.

Some economists distinguish between gains from acquired comparative advantages and gains from natural comparative advantages.

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Trade Barriers: Tariffs, Export Subsidies, and Quotas

protection The practice of shielding a sector of the economy from foreign competition.

tariff A tax on imports.

export subsidies Government payments made to domestic firms to encourage exports.

dumping A firm’s or an industry’s sale of products on the world market at prices below its own cost of production.

quota A limit on the quantity of imports.

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Trade Barriers: Tariffs, Export Subsidies, and Quotas

U.S. Trade Policies, GATT, and the WTO

Smoot-Hawley tariff The U.S. tariff law of the 1930s, which set the highest tariffs in U.S. history (60 percent). It set off an international trade war and caused the decline in trade that is often considered one of the causes of the worldwide depression of the 1930s.

General Agreement on Tariffs and Trade (GATT) An international agreement signed by the United States and 22 other countries in 1947 to promote the liberalization of foreign trade.

World Trade Organization (WTO) A negotiating forum dealing with rules of trade across nations.

Doha Development Agenda An initiative of the World Trade Organization focused on issues of trade and development.

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Trade Barriers: Tariffs, Export Subsidies, and Quotas

U.S. Trade Policies, GATT, and the WTO

Economic Integration

economic integration Occurs when two or more

nations join to form a free trade zone.

European Union (EU) The European trading bloc

composed of 27 countries.

U.S.-Canadian Free Trade Agreement An agreement in which the United States and Canada agreed to eliminate all barriers to trade between the two countries by 1998.

North American Free Trade Agreement (NAFTA) An agreement signed by the United States, Mexico, and Canada in which the three countries agreed to establish all North America as a free-trade zone.

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Trade Barriers: Tariffs, Export Subsidies, and Quotas

U.S. Trade Policies, GATT, and the WTO

Economic Integration

Trade Barriers Take a Hit in 2008

High Food Prices Stir Movement on Tarriffs

The Wall Street Journal

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Free Trade or Protection?

The Case for Free Trade

 FIGURE 34.4 The Gains from Trade and Losses from the Imposition of a Tariff

A tariff of $1 increases the market price facing consumers from $2 per yard to $3 per yard.

The government collects revenues equal to the gray shaded area in b. The loss of efficiency has two components. First, consumers must pay a higher price for goods that could be produced at lower cost. Second, marginal producers are drawn into textiles and away from other goods, resulting in inefficient domestic production.

The triangle labeled ABC in b is the dead weight loss or excess burden resulting from the tariff.

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Free Trade or Protection?

The Case for Protection

A Petition

While most economists argue in favor of free trade, it is important to recognize that some groups are likely to lose from freer trade. Arguments by the losing groups against trade have been around for hundreds of years.

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Free Trade or Protection?

The Case for Protection

Protection Saves Jobs

Some Countries Engage in Unfair Trade Practices

Cheap Foreign Labor Makes Competition Unfair

Protection Safeguards National Security

Protection Discourages Dependency

Environmental Concerns

Protection Safeguards Infant Industries

infant industry A young industry that may need temporary protection from competition from the established industries of other countries to develop an acquired comparative advantage.

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Free Trade or Protection?

The Case for Protection

Protection Safeguards Infant Industries

 FIGURE 34.5 Trade Openness Across the World (Index is 100 minus the average effective tariff rate in the region.)

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An Economic Consensus

Critical to our study of international economics is the debate between free traders and protectionists.

Foreign trade and full employment can be pursued simultaneously. Although economists disagree about many things, the vast majority of them favor free trade.

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REVIEW TERMS AND CONCEPTS

absolute advantage

comparative advantage

Corn Laws

Doha Development Agenda

dumping

economic integration

European Union (EU)

exchange rate

export subsidies

factor endowments

General Agreement on Tariffs and Trade (GATT)

Heckscher-Ohlin theorem

infant industry

North American Free Trade Agreement (NAFTA)

protection

quota

Smoot-Hawley tariff

tariff

terms of trade

theory of comparative advantage

trade deficit

trade surplus

U.S.-Canadian Free Trade Agreement

World Trade Organization (WTO)

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